Cookies along the way.

Menu

Satoshi Nakamoto

There are far more parallel, virtual economies in existence than I realized. For example, I knew that one could spend cold, hard cash on World of Warcraft gold (it looks like 3,000 WoW gp goes for 6.76 USD). After all, this was one of the inspirations for Reamde by Neal Stephenson, in which Chinese gold farmers create a virus with a probably-not-intentionally-misspelled moniker, “Reamde” which takes the user’s hard-drive hostage. In the book, the form of payment required is the in-game currency, which has a

Stephenson's latest book, image via Wikipedia

convertible dollar amount. This was actually quite low in Reamde, but anyway, Stephenson’s plot twists ensued. The point is, USD can be converted in WoW gold, and back to whatever currency you like and quite a few people are doing just that.

Building upon that, there are several other games that have similar currency markets. Second Life has Linden, which is traded against most real, global currencies. However, what I had heard of, but never really investigated, is a digital currency that exists in the “real” world, designed not to be a parallel economy, but as a fully functional, self standing currency. It’s called Bitcoin (trades at 5.53 USD to 1 BTC at the time of this writing).

Somehow, I found myself doing a depth-first-search on Bitcoin information this weekend, when I should have been studying for my midterm. Bitcoin could be a graduate seminar on economics and seeing how I only took Econ 101, which was 10 years ago, I am not qualified to talk to the Bitcoin economics. There is, I believe, a lot of people spending real dollars on Bitcoin speculation and because of this, I recognize that Bitcoin has actual value. Just like the WoW economy, someone is willing to pay 100 USD to buy a WoW character that is level X, or Y amount of Gold. Otherwise, said individual would have spent hours doing that himself.

There is a lot to Bitcoin, and subsequently, there is a lot of information to digest. However, there are some intriguing aspects to Bitcoin. First of all, the creator of Bitcoin is an enigma. Satoshi Nakamoto creates Bitcoin, and then vanishes. He publishes his system design and then is no longer heard from. In his wake, are numerous conspiracy theories worthy of Eco’s Foucault Pendulum and Prague Cemetery. (Both excellent books).

Secondly, Bitcoins enter the economy through mining, and anybody can be a miner. The mining process is quite a bit technical and relies on cryptography. If you are content to know that mining can simply be done by running a computer program until it “strikes gold,” you are better off going to the next paragraph. Otherwise, what this program tries to do is calculate a nonce, such that the SHA256 hash of a “block header” (in which, the nonce is stored), is below a certain target value. For those that stuck around, a hash

Image via Wikipedia

function is a “one-way” function where it is easy to calculate “in-one-way” but hard to go in reverse. For example, given two prime factors (that you know are prime) it’s easy to multiply them together and produce a number consisting of prime factors. However, given the number, it’s hard to find the prime factors. So, Bitcoins are mines by your computer as it chops its way (computationally) at digital ore. If you computer strikes gold, but solving the equation, you receive 50 BTC (at the moment, this value will change). Just like mining for real gold was hard, so it is mining for Bitcoin. See, that wasn’t so bad!

So, the cool thing is, you can be a Gold miner :)

Lastly, there is a degree of anonymity in this system, which is also interesting. If Alice gives money to Bob through the Bitcoin network, the enter network will know that a transaction took place, but it won’t necessarily know who Alice and Bob are. It again uses some cryptography, this time based on Elliptical Curve Digital Signatures and Public / Private Key pairs, but I think I’ve pushed it with the mining bit. (sorry, couldn’t resist the pun).

I think the idea of Bitcoin is fascinating. The mystery behind its creation, its viral peer-to-peer network and its cryptographic foundation make it very interesting and I haven’t even touched upon the economic principles. There are, I think, a few questions that aren’t satisfactorily answered. For example, since there are a fixed number of Bitcoins, how is the currency not going to constantly deflate? Also, like the gold rush, those that are selling the gold mining equipment are making the most profit. In Bitcoin’s case, there are services where you can join a pool of Bitcoin miners, for a small percentage.